A corporation promises to pay a key executive retirement benefits, with the executive's family to receive a payment if the executive dies before retirement. Which arrangement is the standard way to fund this deferred compensation obligation?

Why A is correct

Deferred compensation plans are commonly funded with corporate-owned life insurance: the employer owns and is beneficiary of a policy on the executive's life. If the executive dies before retirement, the insurer pays the death benefit to the corporation, giving the employer funds to satisfy the deferred compensation promise to the family. This is one of the business uses of life insurance under objective LIFE-II.A.5, alongside key person and buy-sell coverage.

Why the other options are wrong

• B) Life insurance is bought on the life of a person, not on a corporation's own existence; the executive is the insured, not the beneficiary.
• C) An annuity provides lifetime income to the executive but does not fund the employer's obligation to pay survivors if the executive dies early.
• D) A group life plan for all employees is a benefit program, not a targeted funding vehicle for one executive's deferred compensation.

Memory hook

Corporate-owned life on the executive funds the deferred-comp promise. Employer owns, employer collects, employer pays.

Why A is correct

In a deferred compensation plan, the employer promises to pay the executive benefits later, typically at retirement, and life insurance may be used to fund that obligation. The employer owns the policy, pays the premiums, and is the beneficiary; the policy's cash value builds tax-deferred to fund the future benefit. This differs from key person insurance, which protects the company against the death of a vital employee, and from salary continuation, which provides continuing pay to surviving dependents. Under split dollar, the employer and the employee or a third party share the policy's premiums and benefits.

Why the other options are wrong

• B) Salary continuation pays ongoing salary to the employee's family after death; here the benefit funds the executive's own retirement income, not survivors.
• C) Key person insurance covers the company's loss from the death of a key employee; here the executive is living and the purpose is retirement funding.
• D) Split dollar splits premiums and benefits between the employer and the employee or another party; here the employer alone owns the policy and is the beneficiary.

Memory hook

Deferred comp = employer-funded retirement promise, backed by company-owned life insurance. Fund now, pay later.

Why C is correct

In a deferred compensation plan, the employer promises to pay the executive compensation in future years, typically after retirement. To fund that promise, the employer often buys and owns a life insurance policy on the executive's life. While the executive is alive, the cash value grows tax-deferred and helps fund the future obligation; if the executive dies first, the death benefit provides the money to satisfy the promised payments to the executive's estate or beneficiaries. The employer is the policyowner and pays the premiums, and the arrangement must be carefully documented to meet tax and ERISA requirements.

Why the other options are wrong

• A) Coverage runs in the wrong direction; the employer, not the executive, owns the policy on the executive's life in a typical deferred compensation arrangement.
• B) The insurer does not pay salaries; it pays policy proceeds. The employer remains responsible for the promised compensation and uses policy cash value or death benefit to fund it.
• D) There is no requirement that the policy be purchased through any particular agent; the validity of the arrangement does not depend on the sales channel used.

Memory hook

Employer insures the key person and banks the cash value to fund tomorrow's deferred pay.